Written by Holly Thomas-Wrightson on Wednesday 2 March, 2022
In January, ICA Anti Money Laundering Course Director James Rickett hosted a webinar on a topic that, for compliance professionals, generates a lot of uncertainty and concern: source of funds (SoF) and source of wealth (SoW). Its importance was reflected in the number of attendees, with over 1,000 registrations pushing the webinar over capacity.
Due to the heightened interest, we are pleased to share with you the following overview of the webinar. In so doing, our aim is to help those compliance and FCP professionals who were unable to attend enhance their knowledge in this area.
James got things underway with an unusual ambition: he hoped that those joining the webinar would, by its conclusion, have more questions than answers. Why? Because, he explained, SoF/SoW is less about binary yes or no answers, and more about the application of the risk-based approach (RBA).
To provide some context, James prefaced his talk by encouraging those present to take some time to think about why SoF/SoW is so important, from a human perspective.
1. Knowing the difference
Source of funds
Though similar in nature and often overlapping, as well as frequently mentioned together in the same breath, a failure to distinguish between SoF and SoW can lead to a lot of confusion.
SoF, James explained, should be looked at as being transactional in nature. It can be made up of income, savings, inheritance, gifts, etc. It’s about the origins of the money that is going into a specific transaction, and more precisely, the activity from which it came. This leads to more of a focus on transaction monitoring and customer due diligence.
Source of wealth
SoW, meanwhile, represents the entirety of someone’s wealth. It encompasses everything that would be looked at for SoF, as well as historical transactions like longer-term savings and any non-liquid assets of the individual, such as car collections, virtual assets, precious stones and metals; even things like vintage video games are included, with James citing instances where mint condition Nintendo 64 games sold at auction for as much as $1.5 million.[1]
2. Balancing the risks with SOF
From a regulatory point of view, there isn’t a specific requirement for organisations to obtain proof of SoF, though many businesses set their own expected levels of investigation. For things like payslips or insurance and savings statements, it can be relatively easy to obtain a paper trail without too much investigation. However, with things like gambling winnings, criminals may be able to falsify their winnings or use them to hide money laundering, such as changing a large sum of money for chips, playing with only a small amount and cashing back out.
SoF monitoring can be fallible when it comes to countering the financing of terrorism (CFT), as it is not uncommon for terrorists to use funds from legitimate means to fund horrific acts. One example James gave was the 7/7 London bombings, which was funded in part by one person who worked as a schoolteacher, and who had a good credit score, requesting a sensible-sounding loan.
With all these risks, the knee-jerk reaction might be to be over cautious. Referring to a Europol study,[2] James emphasised that the UK registers an unusually high level of Suspicious Activity Reports (SARs). However, while caution can be seen a safer option by some businesses, it is often wiser to give customers the opportunity to demonstrate their SoF/SoW, rather than to file a SAR that turns out to be an unnecessary waste of time and an inconvenience to customers.
3. Documentation is key
With SoW, jurisdictional differences can make it difficult to give sweeping advice, especially when it comes to higher risk individuals. For instance, there’s a great deal of variation in approach to dealing with politically exposed persons (PEPs), i.e. whether they are still considered a PEP for a set period of time after their connection to politics, or if they are permanently viewed as being a PEP for the rest of their life, which makes assessing their wealth more complicated.
It can also be difficult to assess wealth, especially for things that will fluctuate, are more difficult to predict what they will be worth if they are sold, or that are otherwise not held as monetary assets, e.g. the aforementioned car collections or other valuable items.
It also may not be easy to verify documentation from historical sources, or it may be difficult to get bank statements for older transactions. The key thing, as James pointed out, was that it’s not necessary to document the source of every single part of that wealth; what’s more important is to build a rationale for how they have accumulated their wealth, and to receive assurances that it was obtained through legal means, and document that instead. If, in the future, the case is raised as having issues and needs to be reviewed, a law enforcement agency can look at this evidence and judge if the decisions made sense.
4. Question, question, question
A lot of the questions raised by attendees throughout the webinar revolved around the same kind of things: ‘what would be the correct thing to do in x situation?’, or ‘if y happens should we do z?’. It was clear from the tone of these, and the other questions that came out of the session, that they were all stemming from the same core feeling: what if I get it wrong? The ambiguity of how to approach SoF/SoW leads many to uncertainty, fearful of the repercussions for any mistakes.
James reiterated throughout that the way to tackle each case is to consider it through the lens of the RBA, and to ensure that there is thorough documentation of all decisions and evidence to support why they were made. This is the core of his initial statement: that he hoped people would leave with more questions than answers. Rather than looking to an outside source, like regulatory bodies to set strict rules to follow, the message was to look at each case and ask the right questions based on that situation.
5. Don’t forget why we’re doing this
James concluded the webinar with an important reminder. Financial crime prevention isn’t just about ticking boxes and going through the motions to meet an arbitrary standard. When reviewing SoF/SoW, reducing the risk of criminals hiding the funds of their crimes and being allowed to profit from their illegal actions is what it’s all about; it’s also about catching people who profit from horrific behaviour like human/animal trafficking or terrorism. Keeping these motives in mind, as well as the guidance and recommendations offered in the webinar, ought to give compliance professionals the tools to perform their roles, confident in the knowledge that they are doing the right thing.
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[1] David Molloy, ‘Super Mario 64 game sells for record-breaking $1.5m at auction’, BBC News, 12 July 2021: https://www.bbc.co.uk/news/technology-57804089 – accessed February 2022
[2] Europol Financial Intelligence Group, From Suspicion to Action, 2017: https://www.europol.europa.eu/sites/default/files/documents/ql-01-17-932-en-c_pf_final.pdf – accessed February 2022